7 Basic Tips to Help Boost Your Credit

Whether you've had credit problems in the past or you're simply aiming to get better interest rates in the future, there are always steps that you can take to improve your credit score. And you can usually take them by yourself without paying for someone else's help. But whether you obtain professional services or go it alone, don't believe the credit counseling agencies that tell you they can repair your credit in a matter of weeks. Restoring damaged credit takes time, often in the neighborhood of one to two years.

It is true that some credit repairs will show up faster than others. Credit scores are fluid numbers that change all the time, as the information in your credit report changes. But most credit scores generally don't change more than 30 points in a quarter. So, just by doing the math you can figure out that if your credit score is, say, in the low 500s and you want to raise it to the mid 600s (the range that most lenders typically begin to consider fairly reasonable credit), it will take about a year of making smart repairs. But, once you've invested the time and effort, your improved rating will pay off in significant cost-of-credit savings and new credit opportunities. Here are some basic steps that will help you work your credit file back into good health:

Obtain and closely examine your credit reports.

If you haven't already done so, the first step in improving your credit is to get a copy of each of your credit reports. You may be surprised to learn that the majority of reports have at least one error, however small. But, if you find something substantial that's both wrong and negative, its correction can help your score leap upward quickly. Keep an eye out for things like:

  • payments that the report shows as late, but which you actually paid on time;
  • accounts that don't belong to you;
  • debts that you paid off, but which still show an outstanding balance; and
  • charge-offs, late payments and other negative entries that should have come off your report by now, assuming it's been more than seven years (or more than 10 years for a bankruptcy).

If you've applied for credit recently and were turned down, pay close attention to the reason stated on the rejection letter. By law, lenders must tell you what specific item (or items) of information in your report prompted the credit denial. This can be a vital clue in turning your score around. It can also be a tip-off that something is wrong in your credit file.

Pay all of your bills on time.

Once you've made sure that your credit reports are correct, the next step in repairing your credit is to make sure that you pay each and every bill on time. Even if you're paying just the minimum amounts due (more than the minimum is strongly recommended), pay those at least, and pay them a few days ahead of time for safety's sake. Just as delinquent and missed payments have a negative impact on your credit score, regular on-time payments will have a major positive impact. Simply put, the longer you pay your bills on time, the higher your credit score will be.

This is a relatively slow route to improved credit, but it's one that's important to have in the long run. Creditors place a great deal of value on consistent behavior. So, if you can't avoid being late with one payment down the road, having an established track record of paying on time can make a world of difference.

Keep using credit.

Whether they've had credit problems in the past or they simply don't trust credit, many people think that they're better off buying everything with cash. But when it comes to credit ratings, this could not be further from the truth. Whether you've had a bankruptcy or some other unfortunate financial situation, lenders want to see that you've turned things around. They want to see evidence that you've learned to handle credit responsibly. If you haven't reestablished credit, you're deemed just as risky as someone currently on the brink of collapse. So, if your objective is to improve your credit score, you're going to have to use some credit. Just be sure to use it responsibly.

Pay down your balances.

Naturally, if you have several credit cards and they're all charged up to their limits, it will make other potential lenders uneasy, and consequently be reflected in your credit score. You can counteract this - and improve your score - by paying down the balances on your credit cards and other accounts. Lenders prefer to see a lower ratio between the amount of credit that you have available on your credit cards and their outstanding balances (also known as your utilization ratio).

Aim to reduce your balances to 75 percent of your total available credit as a first step. Then, over time, bring the percentage down even lower. No one is exactly sure what the perfect number is, but some experts believe that lenders prefer outstanding credit card balances to be no more than about 30 percent of their available credit limit. Others say that 50 percent is acceptable. But whatever a particular lender's preferred number, they all want to see that you're making progress in paying down your total credit card debt, and not just moving it around from card to card.

Keep accounts active.

There are some who may tell you to get rid of any credit cards you aren't currently using. And if you simply can't control yourself where plastic money is concerned, that's probably good advice. But, many credit rating experts point out that if you want to improve your credit score, you should think twice before you close an account. Instead, as stated earlier, a better approach would be to hold your outstanding balances at or below about 30 to 50 percent of your total available credit.

For example, let's say you have three credit cards, and you're thinking about closing one that has a $10,000 credit limit. Right now, the outstanding balance on your two other cards is $10,000, and their two credit limits add up to $15,000. If you get rid of the card with the $10,000 credit limit, then your ratio of credit to debt would immediately rise to 67 percent. If you keep the card, your ratio is 40 percent. One solution might be to cut up the card, but keep your account open. By keeping the account active, you look better on paper financially. You actually look further away from maxing out your existing credit limits, and that translates into a better credit score.

On the other hand, you may not want to keep that third card with a zero balance. Some experts are of the opinion that lenders would rather see three credit cards at 20 percent of their limit than two cards with a zero balance and one at 80 percent of its limit. Of course, paying down the balances is much better for your credit score than just moving them around. But spreading out the debt may also have a positive effect.

Avoid new credit.

The number of hard inquiries on your credit reports does play a role in your credit rating. Therefore, if you're trying to improve your credit, don't apply for more credit cards than you need - even if they dangle that free toaster in front of you just for filling out the credit application.

A large number of credit card inquiries gives lenders the impression that you're planning to run up a lot of debt. They're unable to tell just how many of those accounts you've actually opened, since there's a delay between the time new accounts are opened and the time that they show up in your credit file. Furthermore, new accounts will lower the average age of your credit history; and the longer your history, the better your credit score.

Keep older credit.

The average American has three or four credit cards, so that's a number that the credit reporting agencies consider to be normal. Consequently, that's the number that you should aim for (virtually no one really needs more than that). Just remember, you don't have to get there overnight.

Your credit score may possibly be improved by getting rid of extra accounts. But, again, the key is to consider your utilization ratio before you get rid of any credit cards. For instance, don't close two and leave two charged to the hilt. In order to get the best effect on your credit score, if you're going to close more than one account, do it slowly over a period of several months. Furthermore, when you've paid down your outstanding balances enough to consider getting rid of one of your cards, don't close the account that you've had the longest. Even if it has the highest interest rate of all your accounts, keep the card you've had for the longest time. Lenders like to see a long credit history. So, if you close the one account you've had for twenty years and keep the two that you acquired within the last two years, your credit history will suddenly look a whole lot younger, and that will adversely affect your credit score.

Finally, check your credit reports after you've closed the accounts to make sure that they were reported as "closed by consumer." You don't want them listed as "closed by creditor" because this will give other potential lenders the impression that your line was revoked because you didn't live up to your contractual obligations.

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